Economic Views

Global financial mavens are betting that Taiwan's currency is going to appreciate (go up in value), as Taiwan approaches the signing of the historic financial MOU with China, which probably won't have any benefits for the island as a whole, but which local financial firms appear to assume will make them big players in the emerging cross-strait financial market. In response, the government has moved to limit funds from foreigners invested in currency speculation.

Taiwan will bar foreign investors from putting money in time deposits with immediate effect, the island's financial regulator said on Tuesday, as the authority moves to curb what it sees as currency speculation.

The Financial Supervisory Commission announced the move at a news conference after the island's central bank said in October that foreign investors have parked about T$500 billion ($15.5 billion) in Taiwan dollar accounts.

Foreign funds have been actively entering Taiwan's forex market in recent months, on expectations that the currency will strengthen further.

To put it simply, each time someone puts money into Taiwan's banks as NT dollars, they must buy Taiwan dollars. This new demand puts pressure on the NT to rise in value, just as any other good might when demand for it rises. Not only does a rising NT threaten Taiwan's export industries at a delicate time -- it makes everything they sell more expensive -- but it also threatens a speculative bubble that could do grave harm to the economy when it pops.

Against this background Heritage Foundation today hosts a piece on Taiwan's economic relationship with China, with several excellent observations.

It may be difficult to imagine how the centerpiece of Taiwan's economic strategy could be anything other than more open trade and investment with the PRC. The PRC will shortly be the second largest economy in the world and, barring catastrophic events, will be one of the four largest economies indefinitely, perhaps even becoming the largest within a generation.[3] Such a market is obviously a powerful attraction to an island of 22 million people less than 150 miles off the Chinese coast. However, the most lucrative years for Taiwan-China business and trade have already passed.

As an investment, China is moving from a "growth" stock to a "value" stock. In terms of raw growth, the days of 14 percent GDP gains in the '90s and 12 percent GDP gains earlier this decade are gone, to be replaced (after the post-crisis bounce) by long-term growth of about 8 percent annually. And that is if all goes well.[4]

Specifically, the PRC's successful globalization means there are fewer opportunities left for Taiwanese companies. In the 1980s, the mainland desperately needed intermediaries to connect more fully to the outside world. That is no longer the case.

In the 1990s, China became one of the centers for global production. This process involved several hundred billion dollars of investment from elsewhere in East Asia for the purpose of relocating production to the PRC.[5] Preferential access for Taiwan at that time would have been economic and commercial gold. Now, China's cost advantages are at risk, and production will inevitably begin to move elsewhere. Both the mainland as a source of dynamism for the Taiwanese economy and Taiwan playing a pivotal role in mainland development in return are therefore waning--not waxing--forces.

Beyond China, a central Taiwanese motivation in negotiating ECFA is to secure access to trade pacts involving the Association of Southeast Asian Nations (ASEAN), with which the island has considerable economic ties.[6] But there is no guarantee, even with an ECFA, that China will tolerate ASEAN extending such pacts to Taiwan. Further, the Taiwanese economic relationship with ASEAN shares the critical feature of the cross-straits relationship: a current lack of dynamism.

Other options should therefore be cultivated. In particular, Taiwan should seek partners poised for a period of especially rapid growth, better positioned to achieve rapid gains from fresh globalization, and in greater need of Taiwanese technology and service industries.

An obvious candidate is India. India is now entering a demographic expansion of similar magnitude and importance to the one the PRC is leaving.[7] Technology is an Indian strength but India's service sector offers many opportunities for mutual gain from Taiwanese investment. And, just as with the PRC earlier in the reform process, the potential size of the Indian economy makes opportunities for Taiwan effectively limitless. In some ways, India is China 15 years ago, with a decade of 12-13 percent growth potentially available, to be then possibly followed by the same 8 percent annual expansion China now seeks.

The piece ends with policy recommendations. Just what is China's economic growth is a matter of some controversy, as a piece on Politico today rounded up the voices of critics who think China's growth is in large part illusory. But Scissors' major point, that Taiwan needs to diversify away from China, is one that the DPP attempted to put into operation during its eight years at the helm of the government.

A move toward India has another obvious advantage, and that is India's position as a geostrategic counterweight to China. But our current administration, which has conceded our diplomatic space to the Chinese, isn't likely to move in that direction either diplomatically or economically.
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Daily Links

• AP on gangsters in local politics. Good to see this key feature of the island's political life get some play in the international media. Quick, Economist, another piece on what's really important, Chen Shui-bian!
• Dennis Hickey recommends that the US use weapons sales as a bargaining chip over the missiles facing Taiwan.
• Neil Wade with a fascinating river running trip in eastern Taiwan.
• Cows from the Penghu to Taiwan

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